Monday, June 27, 2005

Alternative Energy: Curing Lebanon's Hemorrhage

- Lebanon is a net importer of oil and (soon) natural gas. Natural gas will be used to power three new power plants that are currently running on fuel-oil, but can be switched to run on natural gas.

- Lebanon suffers from brown-outs because it is unable to purchase the fuel-oil it needs on time. A new government is about to be elected, however. And one of their primary goals is to fix the problem (presumably by speeding up the transition to natural gas). As a side note, the natural gas is to be imported from Syria by pipeline. A pipeline to one of the power stations has already been constructed, but it is not currently operational. It remains to be seen whether the pipeline will be extended to the two other power stations, or whether the government will take the route of liquid natural gas (LNG), which was offered to Lebanon at subsidized prices by either Qatar or Bahrain a few years ago.

- Some oil exploration has been conducted off the shores of Lebanon. The finds do not seem to be significant, but drilling has been proposed as a solution to the problem posed by the expenses of importing fuel. This issue has not been brought up recently, and is probably infeasible in the short-to-medium run.

- Almost five years ago, taxis and commuter buses (which are privately operated) began a mass transition to diesel-run engines. Almost the entire fleets converted their engines from petrol to diesel. The justification was that fuel was becoming too expensive to use. After four or five months of using diesel though, the government banned the fuel, and subsidized a transition back to petrol engines. This government initiative took place after considerable protest with regards to pollution emitted by the diesel engines, which was perceived to be both a health risk and a threat to the tourist industry - one of Lebanon's most profitable (and, consequently, powerful).

- Lebanon's agricultural industry is struggling. Farmers are always complaining that they have no markets for their products, and that costs of production are too high relative to neighboring countries. One of the major reasons they cite for high production costs is the cost of fuel.

- Finally, all of these facts should be put in the context of Lebanon's trade balance, and public debt. Lebanon's public debt in 2004 was 177% of GDP - approximately 35% of that debt is foreign and denominated in either Dollars or Euros. The consequence of those figures is that a significant amount of the country's foreign currency reserves leaves its shores in the form of interest payments to overseas entities. Furthermore, exports in 2004 were estimated at $1.783 billion as compared to imports, which were $8.162 billion. That difference between imports and exports is almost eight-fold! The 2001 estimate for oil consumption was 107,000 bbl/day. At today's prices ($60/barrel), the total cost of importing the fuel adds up to around $2.343 billion per year (assuming that consumption has remained constant since 2001). That price tag adds up to 29% of Lebanon's total import expenses in 2004, and around 131% of the value of exports for the same year.

- Two extrapolations can be made from the above paragraph:

1 - the oil importing and distribution industry is the largest sector in the country's economy, and is likely to defend itself against any threats to its profitability. I have heard that almost every major politician has his or her own distribution franchise and/or storage capacity.

2 - the country is in dire need for alternative energy sources. The import-export figures speak for them selves. Agriculture could be a good way to go since it is a struggling industry, but also the source of strong political constituencies that might counter-balance the power of the fuel industry. Ethanol from farm products such as corn is a good way to go. Bio-diesel is another alternative. It can be made from either farm products such as soy-beans or grease that is collected from restaurants, which is no longer useful for cooking. Either way, we really need to find ways to reduce our dependence on imported energy. An initiative to encourage alternative energy will decrease our current account deficit, and divert money that goes overseas into local industry, hence stimulating sectors of the economy that continue to struggle 15 years after the close of the civil war.

source of data: CIA world fact book


hummbumm said...

alternative energy even at these prices is not economically viable without govt subsidies/tax breaks.
I would like to see some other country demonstrate success with that before lebanon sinks a fortune in promoting it, counting of course the inevitable siphoning off to various pockets that any govt endeavour will bring about. Heck Japan imports all its fuel, i don't think that is the problem, it is distribution on the fuel side, and ridiculous inefficiencies in electricity generation, as well as poor transportation infrastructure (port/roads) cumbersome bureacracy etc.. that affect exports, plus lack of IP rights to promote the service sector that could really do well in leb.
On the plus side we have remittances and tourism, so we are okay!!

Raja said...

property rights is definitely a BIG must for lebanon. I agree with you, and see Lebanon's niche in high-end service industries (including software and R&D). However, we're always gonna have farmers. And if they can plant crops that make fuels that are cheaper and more environmentelly friendly than fossil fuels (which we have to import), then why not?

We'll be helping the farmers by giving them jobs. We'll also be helping the economy by at least reducing a major leakage of foreign reserves. And we'll be better off environmentally.

Will this lead to an economic boom or to full energy self-sufficiency? No. But it would definitely help alot of people in different ways.

One last note. Alternative energy is becoming more and more feasible as technological advances come about and prices of oil continue to rise. For example one Wind turbine can now produce a megawatt of power that is as cheap as a megawatt produced in a natural gas power plant (this assessment is based on natural gas prices in the US).

ThinkingMan said...

Raja- great analysis. Since this deal was concocted at the height of the Syrian regime, there might be a need for a transparent study on the cost/benefits of natural gas vs. liquid gas. Which is cheaper?
Of course, there is suspicion that Syria made this deal so it can sell Lebanon gas.
I have some figures and facts:
- Lebanon imports close to $1 billion from the Gulf in fuel (not sure if it's all for the power plants)
- Syria at the time said they would sell the gas at a "special" price for a number of years. what are these prices?
- Lebanon's gas imports from Syria trippled since 1995. We're a good customer, but were we "forced" or is this the best deal for Lebanon?

I would be interested in shedding more light on this important issue you brought up.

Raja said...

Thinkingman, a demand to take a look at that deal with Syria could definitely be something we could all advocate for. Maybe we could all launch a petition, under the umbrella of "economic independence".

We could also demand a nullification of the contract based on the notion that Lebanon was an occupied country that might not have done what was in its best interest.

Energy imports consume such a large part of our national income! It should concern all of us, and should be a national priority.


1. cancellation of old contract with Syria.

2. Government should invite bidders (including Syria) who compete on a level playing field for the contract.

3. Process should be transparent, begining with the government's Request for Proposal/Bid, to Submission of Bids by the bidders, to the actual selection of the supplier.

hummbumm said...

I disagree that the fuel provided through the farmers will be cheaper. Land in lebanon is expensive, irrigation is an issue, so to me the idea of lebanon providing bio-fuel seems farfetched. In the states with cheaper land and everything, it is still not competitive and massively subsidized. If we want to subsidize farmers, fine, let us do it directly, through irrigation or price floors or whatever..I think that is silly, as the small guy will get screwed anyways and it would be so corrupt, look at the CAP in Europe.

hummbumm said...

AS to natural gas prices to wind energy, first natural gas is used in the states for peak generation as the baseload is covered by coal and nuclear, so it is a an expensive form of electrical generation, which leads to why is lebanon doing this? not sure? but I would have to check where you got the wind turbine comparison. As someone whose job covers investing in utilities here in the states, I can tell you that the industry itself only pursues these options for tax breaks, and view them as too costly ex that even at today's price. The other point of course is that there is a lot of opposition to the giant wind turbines cause they make tons of noise, are pretty ugly and kill birds. I would also wager that most fuel in lebanon is for private transportation which would be unaffected. The proliferation of synfuels and boutique blends in the states has forced large investments in refining processes as well as making the supply more open for dislocation. I don't think it would fly in lebanon, we lack the refining capacity to do this. I would focus on quarries, sewage, garbage etc... as more cost effective ways of improving the environment.

Raja said...


the reason natural gas is expensive in the states, but sought after as a cheaper alternative to fuel-oil in Lebanon is because natural gas is not yet a global commodity. Because the international infrastructure for transporting natural gas is still lacking, there are gluts in certain regions (such as the Middle East) and shortages in others (impending situation in North America). Natural Gas is usually liquified under extremely high pressure in order to be transported by tankers over seas. Such a method is used when pipelines are not feasible. However, the problem is that if something happens to the tanker or the to the LNG storage facility at the destination, the consequence is not just leakage or fire, it is KABUUM! That is why Baltimre Gas and Electric (BGE) built a pier and storage facility for liquid natural gas, but after immense pressure from residents living nearby the facility, simply abandoned it. Considering such impracticalities, I find it difficult for natural gas to become a global commodity with one price for the entire world.

As for agriculture in Lebanon as a source of alternative energy, I've gotta thank you for your info. You see, I'm still exploring this idea, and I need to study it more. However, considering that agriculture in Lebanon is already heavily subsidized for products (such as sugar beet)which gets thrown away because of the useless surplus, I might find it worthwhile to ask some questions and poke my nose in some places - but, again, thanks for the reality check.

hummbumm said...

Go for it, of course my bias is for market forces, and I don't think market forces will lead to alternative fuels in lebanon. I am aware that natural gas is not yet a global commodity, of course for us that means having it piped through Syria, which makes me nervous in principal. I guess if our arab brothers are going to provide us with cheap fuel, then why not? Of course electricity prices in lebanon were ridiculous when oil was at $20 so I am not sure the end consumer will benefit anyways but maybe the govt will lose less money.
I know every country has a soft spot for its farmers, but Lebanon is not really cut out for agriculture in this day and age, except for high value items, vineyards etc... Let me add that when it comes to various crops etc... I am clueless so that last sentence has no empirical evidence, and I could be way wrong.

hummbumm said...

Raja, here is some comparison prices of Gas (combined cycle gas turbine) vs. coal and nuclear in the States. This is based on $7.33/mmbtu gas prices. The variable cost per MWhr is $55.04 for gas, $23.10 for coal and $8.38 for nuclear. Gas is more efficient, btu/kw for gas is 7.4 vs 12.3 for coal and 10.5 for nuclear. Plus a gas plant can be turned on and off relatively easily which is why it is used for peak production, you can't turn off nuclear or coal without huge startup costs so they are the base. What this tells me, is that the gas to lebanon would have to be at $3.12/mmbtu to compare to US coal and $1.14/mmbtu to compare to nuclear. If we are getting those prices it will be good, though of course that just covers the generation and then we get to the transmission and all the EDL overhead and people not paying that makes electricity in lebanon the mess it is. Do you know the price to leb for gas?

Raja said...


I don't know the price of the natural gas that will be sold to Lebanon. But that's the point, the deal was so murky! All we read was that there's this new pipeline being built. It will bring us natural gas from Syria. And, it will save us money. That's it. Barely any more information.

What I do know however, is that the pipeline from Syria OUGHT TO BE part of a larger network of pipelines that encompasses Egypt, Jordan, Syria, Lebanon and eventually Turkey. Therefore, at least theoretically, the network will create a regional market for natural gas that will provide us with at least three suppliers who would (again, theoritically) compete against each other to sell their "products." The connection to Egypt was supposed to come through Cyprus, and then go to Turkey from Lebanon. But, for whatever reason, everyone decided that the better route would be through Jordan, then to Syria and ultimately to Turkey and Lebanon.

I was told a couple of years ago that Turkey has so much natural gas in its pipelines that it really doesn't know what to do with it - it was one of those countries that lack the infrastructure necessary to fully exploit its "natural gas endowment." If that piece of information was not rubbish, and if it still applies for the foreseeable future, then it should be a NATIONAL PRIORITY for Lebanon to encourage the construction of this regional natural gas market - and even invest in it. (If companies don't have reliable and relatively cheap power, how are they supposed to compete???) The more suppliers we have access to, the better for us. Furthermore, as you mentioned, this priority should be part of the broader priority of stabilizing the production and distribution of energy throughout Lebanon, increasing energy efficiencies, and exploring the economic feasibility of "homegrown"/renewable energy sources (my little addition).

The way I see the priorities:

1. fix the "supplier problem" - fuel oil first (as a transition), but ultimately natural gas
2. fix the "edl problem" - privatization has been brought up as an ideal solution - its not. privatization must be accompanied by proper and effective oversight, or else the problem will just be moved elsewhere
3. increase efficiencies by improving building codes, and investing in mass transit
4. explore and encourage alternative energy sources that reduces our reliance on imports (if such a policy is economically feasible)

Anonymous said...

"Farmers are always complaining that they have no markets for their products, and that costs of production are too high relative to neighboring countries."

The need for Lebanese farmers to have a larger market is a reason to establish a relationship with Israel. (I realize that this is easier said than done though)


Anonymous said...

Raja, you wrote: "As a side note, the natural gas is to be imported from Syria by pipeline." Do you really want this? After a full switch to gas is made, Syria will have more of a chokehold on Lebanon than they had when their army was here. Lebanon would be completely at the mercy of whoever has his hand on the pipeline valve.


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